Bank7 Corp. Q2 FY2025 earnings call

• The quarter was one of the best ever, with talented bankers driving strong loan and deposit growth.
• Maintained NIM on the higher end of historical range and benefited from low efficiency ratio, leading to solid core earnings.
• Chief Credit Officer Jason Estes and his team have done an excellent job in maintaining high-quality credit book while growing the portfolio.
• Mentioned the flood in Kerrville, Texas, and encouraged support for the Kerr County Relief Fund.

Loan and deposit growth was strong. The net interest margin (NIM) maintained on the higher end of the historical range. The low efficiency ratio contributed to solid core earnings. Asset quality was strong as noted by Chief Credit Officer Jason Estes.

• Pipeline for loan origination in Q3 looks strong, but loan paydowns are unpredictable. Q1 and Q2 had strong origination, and Q3 is expected to be similar.
• Expect deposit costs to increase slightly to fund growth, but NIM will remain in historical ranges.
• Internally, there is slight expense creep, with $2 million fees split evenly between oil and gas and core in Q3, and $10 million expenses with $1 million in oil and gas and $9 million on other expenses. Efficiency ratio remains in core 36%-38% range.
• Energy assets are projected to be fully cash on cash recovered by the middle of next year.

• Economic conditions can impact interest rates, credit quality, loan demand, liquidity, and banking regulatory policies.
• Unpredictability in loan paydowns, such as the big wave of asset sales in the fourth quarter of last year.
• Potential impact of interest rate cuts on NIM due to loan and deposit beta dynamics.

Q: Wanted to start on loan growth. Obviously a really strong quarter on the growth front, and it's been a really successful first half of the year when many others in the industry have kind of lagged in growth. I know your growth can be a little bit lumpy quarter-to-quarter, but how are you thinking about the growth momentum in the back half of the year?

A: Always depends on the lumpy paydowns. I think our deal pipeline, it looks solid right now. I think we've signaled that the last couple of quarters in a row that things in Oklahoma, things in Texas, economically, they're just in a really good spot. We're thankful to do business where we do business. And so going into Q3, again, pipeline looks strong. But you just never know on the chunky paydowns what's really coming. I think it was fourth quarter of last year, we just had a big wave of companies selling, people selling assets, various things that lead to a little bit of unpredictability there in the payoff side. But from the origination side, Q1 was strong, Q2 was stronger slightly. And I think Q3 is lining up to be similar. But we'll see.

Q: And then how do you think about the NIM outlook, given the growth? Deposit costs were relatively stable in the quarter. Just given the expectation for strong growth, could we see deposit costs start to move up to fund the growth? And how does that impact the NIM?

A: Yes. I think that's a fair way to state. What we see real time is that to keep up on the deposit side, it does cost a little bit more money. We're always focused on offsetting some of the higher-priced money with the transaction accounts, the zero-cost accounts. And so bankers have done a really nice job of dragging that business in. And hopefully, we continue to do so. But I think we've been talking for a few quarters in a row about, yes, we expect a slight degradation but we do expect to remain in our historical ranges. And that holds true today.

Q: And then last for me, we've seen deal activity pick up in your backyard. Just any update on the M&A front for you all?

A: Woody, we've come close a couple of times. Over the last 12 months, we've actually had a couple of signed LOIs. We're very disciplined in our approach and for various reasons, those didn't happen. We continue to meet with various potential partners. We're very focused on -- we'd love to do an MOE, but we just continue to have a lot of meetings and do a lot of evaluations. And I think the tendency for people now as they've improved their AOCI, it's somewhat which is going to loosen up the market. But we're going to just continue to evaluate opportunities in what we consider to be dynamic markets and common cultures. And it's just hard to predict when one of those might break loose.

Q: Just following up on the margin commentary. Curious maybe, Jason, if you can kind of touch on some of the competitive pricing dynamics you're seeing, and just kind of where you're seeing new loans come on the portfolio relative to the 7.6% kind of core yield in the second quarter.

A: Yes, I think it would be slightly lower than the 7.6%, but still, I think if you go back a year ago or 2 years ago, there were fewer banks really aggressively looking for loans, especially after March of '23. And I would consider today's environment very historically normal from a pricing standpoint within the competitive set here in Texas and Oklahoma. It just seems pretty benign and that's nice to see some return to normalcy. So yes, there's always pricing pressure, Nate. But right now, feels like people have kind of settled in on the deposit and the loan side, which is part of what led to the results.

Q: Just kind of thinking about the appetite to maybe add some producers going forward. There's obviously been some M&A announcements within 2 of your key MSAs recently. So just curious kind of what the upside is, maybe add some talent maybe relative to the existing capacity across the teams?

A: Nate, I met with a person in Dallas on Monday, and we've looked at a few lift-out possibilities, and those are delicate things as you can imagine. And I think the dynamic when you look at a lift-out or people coming out of those situations is always the credit comes first and then the deposits to help fund that growth seems to be a slower dynamic. And so we evaluate those and you may see us do something in the North Texas region. But I don't know that it's going to be that anything that's materially dynamic at first. We're very, very careful and culture is very, very important to us. And so we'll see how that goes in the next couple of months.

Q: If I strip out some of the oil and gas impacts, within expenses, I think they run around $8.8 million coming out of the quarter. So just curious how you're thinking about kind of the expense run rate over the back half of this year.

A: Yes, Nate, I believe Q2 is probably a solid guide. Internally, we are showing a little bit of expense creep. So you could increase that slightly but it's probably a good start. I think from a Q3 perspective, fees, $2 million split evenly with oil and gas and core. And then on the expense side, we're using $10 million, with $1 million in oil and gas and $9 million on the expenses. But I don't think it's had a real meaningful impact to our efficiency ratio. And we're still in that core 36% or 37%, 38% core.

Q: Can you just remind us what the remaining life is on the oil and gas assets? Should that largely run off by the end of -- or should the recovery pretty much conclude by the end of next year or before then?

A: I think when I read your piece, you said that we had recovered 75% of our cash outlay. Is that what you said in your piece this morning, Nate?

A: Correct, versus, I think, 68% at the end of last quarter.

A: Right, right. And I think that's pretty accurate.

A: Yes, we should recover fully cash on cash middle of next year, I think, is what we're projecting. So 3 to 4 more quarters.

Q: Just a few follow-ups here. Kelly, I think I missed your commentary you just made about the fees for the third quarter with and without the oil and gas revenue. Can you just go over that again?

A: Yes. We're internally projecting $2 million in fees, Matt, split evenly between oil and gas and the core.

Q: Just going back to the loan growth discussion, it looks like a portion of that growth was within energy lending. Just looking for any more color on kind of the opportunities you see on that side. And then just overall growth that you're seeing in 2Q in the pipeline. Just any color on the overall granularity of these loans. I think some of these loans can be smaller singles and doubles, but I think also you're open to some larger chunkier loans. Just any more color on the granularity what you're seeing these days.

A: Sure. Matt, it's always a mix with us. And I would say going back to the first of this year, I think if you look our production loans, that's really where we're at, $30 million, $35 million in that energy bucket. And what's happened in our energy portfolio really since we went public is just this shift away from service -- the service deals we're in or big fund deals typically. And it shifted a lot more to production, just think hedged oil and gas production. And so that's kind of the story for this first half of the year as well. And then from a C&I standpoint, there's some strength there this year that's getting a little bit clouded by some exits within that portfolio. And so we've really had a nice origination year in the C&I portfolio. And then owner-occupied real estate, we've had a good year there. We're up about $19 million net-net. And then a little bit of growth in our dollars outstanding in the Hospitality portfolio. But again, that's another one like energy and like C&I. And the Hospitality -- between those 3 portfolios, there's just a lot of churn. And so lots of exits, lots of asset sales and then we're constantly trying to reload that customer base. And so we're benefiting from some of these exits on the deposit side. And so we like to stay real active in those 3 books because it's really helped us grow the company here over the last 10 years.

Q: Going back to the margin discussion, I think you kind of hit on some -- a little bit of pressure in the third quarter we already discussed. Just remind us of your rate sensitivity. And I guess the market is currently expecting a September fed funds cut. And I guess, with that on your balance sheet, I'm just now assuming there could be a little bit more incremental margin headwind in the fourth quarter, if that's the case. But just remind me of your overall sensitivity to rates.

A: Yes, Matt, this is Kelly. The first few rate cuts, we were able to keep the loan beta and deposit beta 1 for 1. We anticipate more of the same for the next couple of rate cuts, and as floors kick in will definitely help out on the liability side.

Q: Just wondering if Jason can maybe just comment on what you see in terms of criticized, classified migration in the quarter and just how you're thinking about credit quality and charge-offs over the balance of this year and into next.

A: Yes, I'd say if you go look back over the last several quarters, it's just kind of this continuous path toward a little cleaner, a little smaller NPA number. Really nothing has changed over the last, I'd say, 6 to 9 months internally. Our past dues are very clean. Economic environment here is good. We stick to our underwriting fundamentals. We're not adding new business lines. It's just more of the same. And it's -- there's a little bit of uncertainty, I think, in the economy. If you just look at the headlines and see the tariffs and different things going on with immigration policy, it's pretty remarkable as we talk to our clients and these business owners and how they operate. And you'll see someone have to deal with an issue here or there, but all in all, it's just been a really good run of multiple quarters here where we operate. I mean, the economy is strong.